I have posted a video of something I thought I would never see: all five of the Republican candidates for the U.S. Senate verbally demanding an audit of the Federal Reserve System. You can see it here.

Bernanke is facing what no Federal Reserve chairman has ever faced: public awareness of the Federal Reserve System. From late December 1913, when an almost deserted Senate voted for the Federal Reserve Act, until 2008, when the recession confirmed Ron Paul's warning in late 2007, there was almost no public awareness or even a vague understanding of the Federal Reserve System. The genie is now out of the bottle, where it had been corked since 1913. Ron Paul has uncorked it.

From the November 1910 secret meeting at Georgia's Jekyll Island until Ron Paul's 2007 candidacy for the Republican nomination for President, The Federal Reserve had received a free ride from Congress. There had never been much oversight. That's because FED regulation was an oversight. (The same word is used to convey opposite meanings.)

The Texas Leftist-populist Democrat Wright Patman had been a critic. He had been the chairman of the House Banking Committee until 1975, a year before Paul arrived in Congress. He was a Greenbacker: a believer in a zero-interest economy that achieves this Utopian goal through the use of fiat paper money. Patman was not able to generate much interest in the FED.

Patman did inflict one major wound on the FED. He and California Congressman Jerry Voorhis, another Greenbacker, in the early 1940s persuaded Congress to pass a bill, which Roosevelt signed, that forbids the Federal Reserve from keeping the interest payments from the government bonds it has counterfeited fiat money to purchase. Today, the FED must return to the Treasury all of this money beyond its operating expenses. For 2011, the FED will pay back $77 billion.

A full-scale audit of the FED, if it ever comes, must include an audit of the gold every year. The auditors must see if the gold is in the two vaults. The first vault, at Ft. Knox, is more famous. The more important vault is located at 33 Liberty Street, New York City: the privately owned Federal Reserve Bank of New York. This is the "Die Hard III" vault.

The auditors must do two things. First, they must determine whether there is the same amount of gold as is listed on the FED's books at the fake price of $42.22 per ounce. Second, the auditors must follow the paper trail of ownership. They must make sure that the gold in the vaults is still legally in the possession of the FED.

There is a possibility that the FED has transferred ownership of this gold, through swaps, to European central banks, which have in turn leased – sold – their gold to private buyers. It is not enough to determine that the physical gold is in the two vaults. It is also mandatory to determine whether the FED has indirectly sold the government's gold, which it has held in trust for the government since 1933.

[Note to auditors: pursue this phrase in the FED's statements: "deep storage gold." As to why, read this.]

BERNANKE VS. A FULL-SCALE GOVERNMENT AUDIT

Every FED chairman has resisted any attempt by the Congress to mandate an independent audit of the FED by the General Accountability Office of the U.S. government. Bernanke was adamantly opposed in 2009. He of course did not mention what I regard as the main reason for his opposition to an audit: the missing gold. For all FED chairman, gold is a four-letter word. He mentioned only monetary policy, as if Congress has no authority over monetary policy, despite that ancient "barbarous relic," the U.S. Constitution.

The Congress has recently discussed proposals to expand the audit authority of the Government Accountability Office (GAO) over the Federal Reserve. As you know, the Federal Reserve is already subject to frequent reviews by the GAO. The GAO has broad authority to audit our operations and functions.

This of course was deceptive. First, the FED is audited by a rotating group of private auditing firms, which are appointed by the Office of Inspector General. This rotation system makes long-term accounting continuity far more difficult to achieve. The FED forbids the auditing firm to inspect all of the FED's operations. According to the Federal Reserve Bank of New York,

Operations at each Federal Reserve Bank also are subject to review by the Government Accountability Office (GAO), the audit arm of the U.S. Congress. However, GAO auditors are restricted by law from reviewing monetary policy operations and transactions carried out by the Federal Reserve on behalf of foreign central banks. This restriction was imposed by Congress to assure the independence of the Federal Reserve from political influence.

"Political influence." There is another term for "political influence." That term is "the United States government."

The FED defends this principle: "Monetary policy is far too important to be audited by the government." After all, what claim to such authority does the government have, other than the fact that it created the Federal Reserve System?

Second, a full-scale audit would require Congress to abandon the limitation on its own authority which the banking industry persuaded Congress to impose on itself. This is why Bernanke opposes an audit. He added this in 2009.

The Congress recently granted the GAO new authority to conduct audits of the credit facilities extended by the Federal Reserve to "single and specific" companies under the authority provided by section 13(3) of the Federal Reserve Act, including the loan facilities provided to, or created for, American International Group and Bear Stearns. The GAO and the Special Inspector General have the right to audit our TALF program, which uses funds from the Troubled Assets Relief Program.

The Congress, however, purposefully – and for good reason – excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy.

The phrase "balanced the need" is a code phrase for "abdicated Congressional authority."

Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence.

But now the twits are facing signs of a political rebellion. Millions of voters have figured out that the FED is a scam that is run for the benefit of the largest commercial banks, including foreign central banks. Ron Paul represents this view. A new generation of candidates for Congress is finding that there is no broad constituency in the electorate that comes to the defense of the FED. Most voters still don't have any opinion, but among those who do, the opinion is negative.

The FED has relied on secrecy and obscurity to protect it from criticism for almost a century. That strategy worked until 2008. But Ron Paul was like the little boy at the emperor's parade. "The emperor has no clothes!"

The emperor is Bernanke, a bland academic who surely could use a charisma implant.

This attack is a major break from the past. William McChesney Martin lasted for over 18 years, from Truman to Nixon. He was unassailable. Arthur Burns followed. He smoked a pipe at Congress, and seemed so wise. G. William Miller was a monetary neophyte, but he only lasted 18 months. Carter somehow persuaded him to resign to become Secretary of the Treasury, where he could do no more damage. Then came Paul Volcker, 6 feet 8 and a cigar smoker. He overpowered any critics. Then came Greenspan, the seeming wizard, whose FedSpeak befuddled Congress, and whose policy of inflate and inflate, obfuscate and obfuscate, and warn about inflation worked just fine for 18 years. He departed just in time.

Then came the hapless Bernanke, George W. Bush's gift to the world in 2006. Obama re-appointed him in 2009.He will serve until February 1, 2014. This is good for FED-bashers. He will go down in history as the footnoting scholar who was in charge when the tide of public opinion went from "What's the FED?" to "audit the FED!"

DOUBLE-COUNTING THE GOLD

If the FED is fully audited, it is likely that the audit will reveal that the gold is encumbered. Foreign central banks have leased their gold. This is a phrase for "sold the gold," since the people who borrowed it at 1% per annum then sold it for money and bought government bonds paying 5% or more. They cannot sell these bonds at face value; the bonds have fallen in value. They cannot afford to buy gold in the open market to return the gold to the central banks. The price is already far above what they sold it for.

The central banks dare not demand a return of this gold. The gold is still on their books. The IOUs they received from the borrowers are counted as being as good as gold. The voters do not know that the gold is missing.

In December 2004, an obscure committee with the International Monetary Fund submitted a report on swaps and gold leasing. With respect to accounting for gold leasing, the report admitted that there are no standards. "The statistical implications of gold swaps and gold loans/ deposits are complex and have not been fully worked through. Work is still being undertaken by the Committee to address the implications." What implications? One of them is the issue of double counting.

In particular, gold may be double counted with either a gold swap or gold loan/deposit if the party acquiring the gold were to on-sell it outright, because both the original owner and the outright purchaser would report ownership of the gold. In addition, there is the difficulty of having monetary gold being used in these transactions for purposes other than for reserve assets, and how (de)monetization would apply if the gold is sold for industrial purposes. Moreover, there is a proposal to treat (some) nonmonetary gold as a financial asset, rather than a commodity, and the outcome of that discussion may have further implications on the treatment of gold swaps and gold loans/deposits. Finally, how the "fee" for gold swaps and gold loans/deposits should be treated has yet to be resolved. All these matters are being considered by the Committee and a report will be taken to the AEG in due course.

Nothing has changed.

The Federal Reserve has always denied that it has leased the gold, meaning the government's gold. But the FED is involved in all kinds of swaps with foreign central banks. And remember, quoting the Federal Reserve Bank of New York,

. . . GAO auditors are restricted by law from reviewing monetary policy operations and transactions carried out by the Federal Reserve on behalf of foreign central banks.

Consider the political fallout if it should be revealed that the physical gold in the vault of the Federal Reserve Bank of New York has claims against it. What if it should turn out that the Federal Reserve Bank of New York, which is a privately owned organization, has in some way compromised the government's ownership of its gold?

What kind of pressure would be brought on the assembly of twits by the voters to "get our gold back"? What kind of response from the twits would be likely?

Bernanke would dutifully go to Congress to present his footnotes showing that this was good for the world economy. He would find a warm reception: hot fury.

He really does think that providing footnotes will protect him. This is what he learned in academia. But politicians pay no attention to footnotes.

Bernanke's credibility is nothing like the credibility possessed by all FED chairman except Miller, who is long forgotten. He has been able to fend off calls to audit the FED for four years. But Ron Paul is now a serious contender for the Republican nomination. He keeps returning to one theme above all others: the incompetence of the Federal Reserve. No serious Presidential candidate in history so much as mentioned the Federal Reserve in his campaign speeches.

The media keep brushing off Paul because of this. They keep saying that this issue has no traction with normal voters. But the issue has traction with at least 20% of the voters in the Republican primaries so far. That is more voters than the bureaucrats at the Federal Reserve have ever encountered. They have no idea what to do about this.

CONCLUSION

Paul's candidacy will continue for months. He will continue to hammer on this theme: the Federal Reserve is incompetent. This message will stick, whether or not he gets the nomination. His supporters are like Bruce Willis: die hards.

The Federal Reserve will never again be able to hide from the voters behind a curtain of secrecy. Bernanke is the Wizard of Oz, and Ron Paul is Toto. He has pulled back the curtain. From this time on, whenever you read a report on his testimony before Congress, think of this scene.

The main difference between this scene and a Bernanke speech is footnotes.

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